Shifting NZ's anti-money laundering focus to an outcomes oriented one and away from a box ticking approach would boost ability to detect, prosecute & prevent serious crime, expert says

By Gareth Vaughan

The Government appears to be missing an opportunity to move the focus from an outputs-oriented, or box ticking approach, to an outcomes-oriented focus as it expands New Zealand's anti-money laundering laws, says an anti-money laundering expert.

Ron Pol, a former lawyer who is completing a PhD in anti-money laundering, raises this concern in his submissions on the Government's proposals for so-called phase two of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act, which will see the Act extended to real estate agents, lawyers and accountants.

In November Justice Minister Amy Adams said extending the AML/CFT Act could cost 'mums and dads' $1.6 billion over 10 years. Nonetheless in December Adams said the Government planned to introduce the AML/CFT Amendment Bill to Parliament early this year and have it passed by mid-2017. She said extending the AML/CFT Act has the potential to disrupt up to $1.7 billion in fraud and drug crime over the next decade.

"This will mean less crime and fewer victims. Estimates also suggest it may prevent up to $5 billion in broader criminal activity and reduce about $800 million in social harm related to the illegal drug trade. The reforms will also protect and help New Zealand live up to its reputation as being corruption free and a good place to do business. They will bring us into line with international standards, and help prevent New Zealand becoming a target for overseas money launderers and terrorist financers," Adams said.

The Government is now analysing submissions.

Pol questions whether the primary objective of the AML/CFT Act extension is to meet NZ's international obligations, or to materially and substantially improve this country's ability to detect, prosecute and prevent serious crime. He wants emphasis on the latter.

'A beyond compliance approach'

Pol argues for a move away from cumbersome and costly compliance activities that those already supervised under the AML/CFT Act sometimes see as "compliance for the sake of compliance", to a beyond compliance approach that "consciously, consistently and inexorably focuses on materially, substantially and demonstrably improving New Zealand's capacity to detect, prosecute and prevent serious crime." Such an approach would demonstrate the value of AML/CFT controls where currently many entities forced to comply with the laws only see cost.

"There is a world of difference between the old outputs-oriented approach of making more rules, and the modern outcomes-oriented focus on rules that work, in this case, by substantially (and demonstrably) improving New Zealand’s capacity to detect, prosecute and prevent serious crime and terrorism," Pol says. "The evaluation draft suggests that government has decided only marginally to improve New Zealand’s capacity to detect and prevent serious crime, which seems a bit odd."

The government's proposals don’t address fundamental policy issues facing policymakers globally, Pol argues. Rather, they merely continue the old incremental approach of filling gaps and adding reporting entities seen by parliamentarians elsewhere in the world as no longer appropriate.

"The current system’s lack of effectiveness prompted a Canadian Senate committee to say that 'the time for examination of fundamental issues has arrived'," Pol says.

"Not so, here, it seems. The result is that the phase two extension should bring New Zealand into line with international standards, by old-school output measures proven to be ineffective. From a contemporary outcomes perspective, however, the proposals will likely make a small but not significant difference to New Zealand’s ability to substantially and demonstrably improve its capacity to detect, prosecute and prevent serious crime."

"That would be unfortunate. Not just for the obvious reason, that many criminals might continue operating, just within a different set of displacement gaps. Nor even because it offers up New Zealand as a case study for academics studying policy effectiveness gaps."

The 2013 Canadian Senate report Pol cites notes that according to the United Nations, money laundering is “any act or attempted act to disguise the source of money or assets derived from criminal activity.” The annual value of global money laundering is estimated by the UN to be between US$800 billion and US$2 trillion, while money laundering in Canada in 2011 was estimated to be between C$5 billion and C$15 billion.

A NZ Herald report last year, based on information obtained under the Official Information Act, details police estimates of $1.6 billion of locally-generated dirty money, mostly from drug dealers, and fraudsters being laundered annually. However, if tax evasion and dirty money from overseas is included, plus money laundered through New Zealand shell companies and trusts, the figure's likely to be much higher than this.

An opportunity for NZ to lead international change

Pol also says some "compelling" crime prevention outcome measures "curiously" missing from official documents show New Zealand already fares significantly better than many other countries. Data in his unpublished thesis illustrates New Zealand leads a number of countries against whom we traditionally compare ourselves, in some cases by a considerable margin, Pol says. His thesis is a political science PhD focused on policy effectiveness and outcomes, showing new evidence illustrating how lawyers, accountants and real estate agents "have been used to facilitate criminal financial transactions since at least 1992."

The official documents, meanwhile, cite output-oriented metrics.

Pol suggests there's an opportunity for New Zealand to lead change within the Financial Action Task Force (FATF), the global AML regulatory body, and help other countries unlock billions of dollars worth of criminal assets from which this country could benefit "from a share of those forfeitures."

"Rather than just follow FATF rules, New Zealand has an opportunity to lead change within FATF itself, and which could potentially lead to changes that allow FATF’s new ‘effectiveness’ rules to actually meet their intended results, globally. Analysis of the new effectiveness framework, and from the 26 mutual evaluations conducted to date suggest considerable untapped opportunity to lead such change. Each of these opportunities is usefully complemented by New Zealand’s recent top-equal ranking in the corruption-perception stakes," says Pol.

With a 'mechanistic application' of AML/CFT 'the model of supervision hardly matters'

The Government plans to retain the existing anti-money laundering supervision model, which features three supervisors being the Reserve Bank, the Financial Markets Authority, and the Department of Internal Affairs (DIA). The DIA will take on supervision for compliance by real estate agents, lawyers, conveyancers, accountants and businesses that trade in high value goods such as jewellery, precious metals, precious stones, watches, motor vehicles, boats, art and antiquities.

Alternatives floated in the Ministry of Justice's consultation paper last year were moving to a sole supervisory model along the lines of Australia's AUSTRAC, or to a multi-agency model like the UK with some professions supervising themselves.

Pol argues that if New Zealand sticks to a "mechanistic application" of FATF recommendations and a standard education/partnering methodology, the model of supervision hardly matters.

"In relation to the ability materially and substantially to improve New Zealand's capacity to detect, prosecute and prevent serious crime, any model is likely to prove about as effective as currently evident in jurisdictions with a single supervisor model as in Australia, as those with a multi-agency model as in the UK. That is, not very," Pol says.

"If, however, New Zealand chooses to implement phase two with policy effectiveness its core, the single supervisor model is likely to best complement and enhance New Zealand's capacity to detect, prosecute and prevent serious crime."

Pol's submissions can be seen here, here and here.

Below is the summary of recommendations from the Canadian Senate report

The Desired Structure and Performance

1. The federal government establish a supervisory body, led by the Department of Finance, with a dual mandate:

 to develop and share strategies and priorities for combatting money laundering and terrorist financing in Canada; and

 to ensure that Canada implements any recommendations by the Financial Action Task Force on Money Laundering that are appropriate to Canadian circumstances.

This supervisory body should be comprised of representatives of federal interdepartmental working groups and other relevant bodies involved in combatting money laundering and terrorist financing. (p. 9)

2. The federal government require the supervisory body recommended earlier to report to Parliament annually, through the Minister of Finance, the following aspects of Canada’s anti-money laundering and anti-terrorist financing regime:

 the number of investigations, prosecutions and convictions;

 the amount seized in relation to investigations, prosecutions and convictions;

 the extent to which case disclosures by the Financial Transactions and Reports Analysis Centre of Canada were used in these investigations, prosecutions and convictions; and

 total expenditures by each federal department and agency in combatting money laundering and terrorist financing. (p. 10-11)

3. The federal government ensure that, every five years, an independent performance review of Canada’s anti-money laundering and anti-terrorist financing regime, and its objectives, occurs. The review could be similar to the 10-year external review of the regime conducted in 2010, and could be undertaken by the Office of the Auditor General of Canada. The first independent performance review should occur no later than 2014. (p. 11)

4. The federal government consider the feasibility of establishing a fund, to be managed by the supervisory body recommended earlier, into which forfeited proceeds of money laundering and terrorist financing could be placed. These amounts could supplement resources allocated to investigating and prosecuting money laundering and terrorist financing activities. The government should ensure that implementation of this recommendation does not preclude victims from collecting damages awarded to them by a court of law in a suit brought under the Justice for Victims of Terrorism Act. (p. 12)

5. The federal government ensure that the Financial Transactions and Reports Analysis Centre of Canada and the Royal Canadian Mounted Police employ specialists in financial crimes, and provide them with ongoing training to ensure that their skills evolve as technological advancements occur. (p. 12)

The Appropriate Balance Between the Sharing of Information and the Protection of Personal Information

6. The federal government require the Royal Canadian Mounted Police, the Canadian Security and Intelligence Service, the Canada Border Services Agency and the Canada Revenue Agency to provide quarterly feedback to the Financial Transactions and Reports Analysis Centre of Canada regarding the manner in which they use case disclosures and how those disclosures could be improved. (p.14)

7. The federal government permit the Financial Transactions and Reports Analysis Centre of Canada to provide case disclosures in relation to offences under the Criminal Code or other Canadian legislation. (p. 14)

8. The federal government develop a mechanism by which the Royal Canadian Mounted Police, the Canadian Security and Intelligence Service, the Canada Border Services Agency and the Canada Revenue Agency could directly access the Financial Transactions and Reports Analysis Centre of Canada’s database. The Privacy Commissioner of Canada should be involved in developing guidelines for access. (p. 14)

9. The federal government and the Financial Transactions and Reports Analysis Centre of Canada, in consultation with entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations, annually review ways in which:

 the compliance burden on reporting entities could be minimized; and

 the utility of reports submitted by reporting entities could be optimized. (p. 15)

10. The Financial Transactions and Reports Analysis Centre of Canada provide entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations with:

 on a quarterly basis and specific to each entity, feedback on the usefulness of its reports;

 on a quarterly basis and specific to each sector, information about trends in money laundering and terrorist financing activities; and

 tools, resources and other ongoing support designed to enhance the training of employees of reporting entities in relation to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its obligations. (pp. 15-16) viii

11. The Financial Transactions and Report Analysis Centre of Canada review its guidelines in relation to the period in which reports must be submitted to it by entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations. The goal of the review should be to ensure that, to the greatest extent possible, reports are submitted in “real time”. (p. 16)

12. The federal government, notwithstanding the recently proposed changes to Canada’s Witness Protection Program Act, ensure that the safety of witnesses and other persons who assist in the investigation and prosecution of money laundering and/or terrorist financing activities is protected. (p. 16)

13. The federal government establish a mechanism by which employees of entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations, and other individuals, could anonymously notify the Financial Transactions and Reports Analysis Centre of Canada about:

 failures to comply with the requirements of the Act; and

 individuals or entities possibly complicit in money laundering and/or terrorist financing. (p. 17)

The Optimal Scope and Focus

14. The federal government enhance Canada’s existing anti-money laundering and anti-terrorist financing regime by placing additional emphasis on:

 the strategic collection of information; and

 risk-based analysis and reporting. (p. 19)

15. The federal government review, on an ongoing basis, the entities required to report under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its regulations to ensure the inclusion of sectors where cash payments exceeding the current $10,000 threshold are made. (p. 19)

16. The federal government eliminate the current $10,000 reporting threshold in relation to international electronic funds transfers. (p. 20)

17. The federal government review annually, and update as required, the definition of “monetary instruments” in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in order to ensure that it reflects new payment methods and technological changes. (p. 20)

18. The federal government, in consultation with the proposed Financial Literacy Leader, develop a public awareness program about Canada’s anti-money laundering and anti-terrorist financing regime, and about actions that individuals and businesses can take to combat money laundering and terrorist financing. (p. 21)

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20 Comments

Might be just me...but I don't see this National government about to jump at the opportunity to lock this down.

Any Government, not just National.

Rick/Murray, if you're both right, the interesting question (I reckon) is why that might be.

I assume that Ministers (any NZ Govt) are genuine. They genuinely want to do (and typically believe they are doing) the best for NZ. It would be a great area for research. Some hypotheses to test might include advisers that equate good/bad investment as if it has the same effect. Advisers are familiar with income multiplier effects and the benefits of investment, and failure to make the distinction enables advice that logically facilitates poor decisions by genuine leaders. Ditto with advisers inculcated with uncritical ML thinking. I've seen quite a lot of it lately, though haven't formally tested it. There seems a strong (and equally genuine) belief that (despite evidence to the contrary), 'the' rules must be working, so more of the same will fix any gaps. Again, a logical path to poor decisions by (any) government, even whilst completely genuinely thinking they're doing the best for NZ.

Plenty of scope for a good research project I think, with a mix of ML expertise, economists and behavioural scientists.

I agree Ron. IMHO though i wonder if it is because a) their advisors too wedded to a "conventional wisdom" perspective. They think because our reputation is good the bad eggs won't come here. They can't accept that a good reputation combined with naivete just creates opportunities for the criminal elements. This would explain the lax rules around Financial Institutions. b) denial. Many believe that a large amount of the foreign cash that went into the property market was a laundering operation. for the Government to accept that possibility and the need to act on it would mean their perspectives on (c) were in error and can't admit to being wrong. c) The economic well being of the country. For a few years now the Government has told us, and many others continue to believe that rising house prices is good for the economy. But their rationale just does not make any sense. It creates increasing costs, deprives ordinary kiwis, doesn't create new jobs, or income from the country (the argument that the foreign cash coming in is income is specious, because eventually that foreign buyer will take it bake out and in the mean time the rent from the property is a cash stream leaving), and d) they believe that NZ is too small, and if we piss the world off enough they'll stomp on us doing LOTS of damage. They seem to forget that there are a few times when we had the courage to stand up and say ENOUGH! And it stood us in good stead, enhancing our reputation and standing in the world.

Yep, for offshore illicit funds, NZ's good reputation is a drawcard, not a barrier. Money arriving somewhere else ex-NZ passes through more easily while ex-Vanuatu etc is scrutinised.

Likewise as you note, we think we're ok, so we're not looking for it (banks aside, they seem to do a surprisingly good job with limited transaction visibility).

When we enable foreign criminal organisations' transaction flows, it hurts us too. Reputation as you say. Also because we're in effect supporting the business model of the criminal organisations sending vast shipments of methamphetamine here. Curious really. Police do a tremendous job stamping out the drugs, but our laid back approach to money flows suggests it's likely NZInc is facilitating the financing of the drugs shipments NZ Police is trying to stop.  So we effectively resource them with a fresh batch of handcuffs each year, then ask them to tie one hand behind their backs.

It's vital to get 'Money Laundering' under control since most of these funds are channeled in to large asset acquisition; mainly off shore property. We've known for years that Foreign Buyers have been squirreling their off shore funds in to NZ property market and driving up prices, and over inflating the market and NZD.

This has been at a huge expense to all our vital industries which are being crippled by the over inflated NZD and NZ residents are finding it more and more impossible to afford a home in their our land.

It was basically the Panama Papers that prompted the UK to do something about London's over inflated property market and putting measures in place to prevent money laundering. Creating a global summit.
https://www.gov.uk/government/topical-events/anti-corruption-summit-lond...

How money laundering works: http://www.ukunmaskthecorrupt.org/

Unfortunately National have been dragging their feet for way too land on really putting the same measures in place!

There is also some evidence that illicit funds has a bigger impact on prices than property bought with legal earnings, at least in urban areas. And of course there's also often no corresponding benefit to the economy that legitimate funds would generate, except for legal/real estate fees. The benefits accrue almost exclusively to criminal organisations, enabling their prosperity and growth.

Yes I very much agree, though it seems that National don't want to upset the Real Estate Agents since it's far too lucrative for them and is the back bone of our false economy keep our GDP up.

So in your opinion Ron where do you feel that most of these 'funds' are coming from?

The official ML estimate ($1.35b available for ML, thus just under $1.8b pa criminal proceeds) is only for (some) onshore-generated crime proceeds, mostly drugs and fraud. So, that's one source.

The estimate excludes another source, transnational criminal funds coming into and transiting NZ. Probably fair enough Police don't guess this. It could be maybe only a 'tiny' billion dollars or so, or a great many times that figure. This stuff flows according to gaps and ease. Currently its pretty easy, so could be large, but estimating it (objectively) is fraught. It's also very difficult to assess even likely quite large components such as trade-based ML, let alone attribute multi-jurisdictional trade routes between jurisdictions. (Nor is it dependent on actual physical shipping, some of it is done on the papers, with nary an actual ship required).

The other figure excluded from the official estimate is tax evasion, so that's another source. It's criminal too of course. Tax depts elsewhere publish estimates, but IR here has long been cagey about this. It seems they reckon the quantum evaded would spook the tax-paying public into being less compliant ourselves if we knew how much slips through. A great piece of work a few years back led by SFO came close to doing it, but was quietly shelved (I don't know by whom, and it's speculation why, but shelved it was). Other people are better at estimates of the tax evasion component than me, but most pluasible measures I'm aware of reckon it larger than the entire official police ML estimate from domestic drugs and fraud.

Another element excluded is the money that doesn't come here, but is facilitated by NZ Inc. NZ foreign trusts are the classic here. Also ordinary trusts and companies. Recent example of (allegedly) $270m or so of $1.2b laundered into US of $3-5b alleged stolen from elsewhere was controlled by NZ trusts with NZ professional trustees acting for offshore interests alleged to have laundered it. Again, estimating the amount of Manhattan real estate that NZ Inc facilitates the purchase with criminal funds is fraught with difficulty. (Not impossible. Nor impossible to inderdict. All of this stuff needs only two things. Both made of steel. Both quite large).

Facilitated by NZ Inc. Yes but some how NZ remains so squeaky clean never mind the Panama Papers, NZ Trust Funds etc... How is it that Transparency International doesn't seem to see what's going on??

http://www.transparency.org.nz/
WTF!

There's nothing to see because that's just how its designed. (Not for criminal purposes of course, just perfectly designed for that purpose too). NZ foreign trusts is one of a series of internationally distributed criminal getaway car manufacturing plants. But we don't ever put GPS in the cars, so we can't track where they're really going. They run on cash, but when they suffer obvious issues, we never lift the bonnet to see what type of cash now courses through the fuel pipe after we sold it. And they're all factory fitted with tinted windows, so we're not sullied with actually knowing who's now driving them. Nor is there a WOF requirement, so we don't need to check on them. So, if they don't actually crash and some occupants spill out into the daylight, nothing to see...

Double post (Ooops)

That's a lot of compliance cost!

Maybe the model needs a bit of re-design?

Yep, in a sense. Big compliance cost (and near zero effectiveness by objective measures) under the current model. And 'more of the same' produces even more compliance cost with marginal efectiveness gain. A few simple changes should be able to produce a different model (a) less expensive, and (b) vastly more effective. It's what I term 'beyond compliance'. There are several possibilities I think.

One involves a radical overhaul to achieve that objective (this is a 'pure play', the sort of thing we might do if we started as if it was 1989 and we had a blank sheet, but we don't, so politically unlikely, here and globally). The other uses the existing system, slightly repurposed. The effect should be much the same. Working on it now. Book out later this year.

[The test if I'm right will be the amount of flak it receives. Many will want to protect the vast AML industrial complex as it is. My audience is those who want the system to be effective, without imposing the unnecessary costs and unintended consequences its currently dogged with. Even if I'm right, there's no guarantee of success. In fact, more likely the opposite given post-1989 results in the tussle between those camps. Not overt of course, as all claim to be in the latter, and most genuinely believe it. Which makes it all the more interesting...]

quote "help New Zealand live up to its reputation as being corruption free"

NZ is not corruption free - it is just the least corrupt among the corrupt

The following case reported in the NZHerald referred to corruption which has now been watered down to industrial scale bribery
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1180...

Another academic/lawyer coming to our rescue, that's reassuring given the successful track record that these professions have shown in political leadership in the west over the last 40 years or so. Putting aside all the academic waffle and self righteous delusions, it is plain to see where these calls to action will take us:
1) As in parts of the US, if you get pulled over and the police find $1000 on you they can confiscate it and YOU have to prove you got it legitimately. It's an obvious method of theft by increasingly desperate western governments, which will largely hurt innocent people and do very little to criminals. Criminals are simply the guise and excuse. Small business people are being criminalised for "suspicious" multiple bank deposits even though they've done nothing wrong.
2) The next phase will be the elimination of cash, which is one of the last freedoms we truly have left. This will hurt the little guy the most without a doubt. And even if they get half of all the dirty money, it will barely plug a small hole in the financial Titanic that our governments are steering.
3) Of most concern is that all these new regulations like FATCA, etc, are working to destroy the free movement of capital and trade and will make the next recession/depression exponentially worse. Money launderers and terrorists and drug dealers will carry on regardless. Sadly, the rest of us will pay for all this stupidity.

Much of what you say, I agree. I'm suggesting something a bit different. Less (or at least better directed) regulation will be more effective and impose fewer costs on the rest of us.

If you want to know how much money is laundered through NZ foreign trusts, read the Sarawak Report, which broke open the 1MDB money-laundering scandal. I wrote about some of the implications for NZ here: http://www.noted.co.nz/money/economy/new-zealand-the-little-tax-haven-th...

Thanks, good summary. Nice closing line... but I suspect that will come to light in the future :-).

Thanks Graham.